Courts in the UK will not have finished the process of officially signing over insurers’ books of business by March 29, when the UK is scheduled to leave the EU, meaning that some customers may not be able to claim on their policies in the event of a no-deal Brexit.
The head of the UK Financial Conduct Authority, Andrew Bailey, told parliamentarians on Tuesday that “through no fault” of the courts, “realistically, it’s not all going to be done in time”.
As many as 9m policyholders in Europe who hold a contract with a UK insurer are potentially affected. The Association of British Insurers, the trade association, points to British expats across the bloc, and any companies with corporate liability policies with British insurers.
Because of the legal uncertainty posed by Brexit to financial contracts, insurers planned on either getting new regulatory permissions for existing units, or transferring contracts to a new entity, which requires court approval. The Bank of England secretly warned courts in early 2017 to expect a deluge of such applications, initially estimating that 6m policyholders in the UK and 30m policyholders across the European Economic Area could be affected.
While the UK has taken steps to ensure that UK customers of EU insurers will hold valid contracts no matter what, a reciprocal step is yet to be taken by the EU as a whole. The latest BoE estimate shows that 9m policyholders in the EEA remain at risk.
Mr Bailey told the Treasury Select Committee on Tuesday that he was “more optimistic” than in December that should the UK crash out of the bloc with no deal or transition period, the EU will take measures to ensure that policyholders can still claim on their insurance.
Alisa Dolgova, manager for Brexit policy at the Association of British Insurers, said being forced to use a “time-consuming court process” to ensure they can continue servicing contracts and paying claims in the EU post-Brexit was “never going to be ideal”.
“Regulators in the UK have taken sensible steps to allow European insurers to make payments to customers in the UK and it is extraordinary that the EU authorities have still failed to reciprocate to provide peace of mind to millions of EU policyholders,” she added.
Mr Bailey’s comments come hours before MPs are due to vote on the deal agreed by Theresa May, the prime minister, and the EU. It is expected that the historic vote will end in defeat for Mrs May’s compromise deal by a large margin.
The FCA and the Treasury have had discussions about the viability of other models for a Brexit withdrawal agreement, Mr Bailey said.
The BoE has already provided economic forecasts for a range of different Brexit models, from a no-deal potentially leading to the sharpest contraction in national income since the second world war, through to a short-term boost to the economy if the model closest to Mrs May’s deal is adopted, with a close economic relationship to the EU.
Meanwhile, the FCA is prepared to allow City firms some leeway in their reporting requirements in the event of a no deal.
The FCA has had to “lift and shift” EU rules into UK legislation as a first step to cope with how Brexit will change financial regulation in the UK. On Day One of Brexit, the rule book should look the same, but for elements known as “inoperables” that cannot be copied — for instance, any reference to EU watchdogs having direct oversight of UK-based firms.
In turn, firms regulated by the FCA are also having to overhaul their systems.
Mr Bailey said on Tuesday that if that process has not been complete by March 29, the Brexit deadline, and if the UK left the EU with no deal or transition period, then the FCA would give firms some breathing room with reporting requirements.
“I know it seems quite tame, but it’s actually quite a big intervention,” he told the select committee.
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